HM Treasury: Planning for economic infrastructure - Public Accounts Committee Contents

2  Government's engagement with the market

8.  The Government expects 64% of its planned investment in economic infrastructure to be wholly owned and financed by the private sector.[13] In such cases the government's role is to put in place the conditions required to encourage private firms to make the necessary investment, and to assist the national and international investment community to provide finance on viable terms.[14] Investors will decide whether to invest in UK infrastructure based on their assessment of risk and returns.[15]

9.  Investors told us that there were aspects of the UK infrastructure market which encouraged investment. For example, the networks for transmitting water and energy, where investor returns were regulated and relatively predictable, created a stable environment which made it easier to obtain debt finance more cheaply.[16] However, they noted that for them to invest in other areas of public infrastructure would require greater clarity over government policy. E-ON told us it would continue to defer decisions on energy generation investment until the Energy Bill had been enacted and there was clarity over the extent to which the Government would support wind power. This support may involve guaranteeing payments to the generators for the capacity they provide irrespective of whether the conditions are right for wind power to be generated.[17] We have already voiced our concerns over similar guaranteed revenue arrangements for companies involved in the transmission of electricity from offshore wind power.[18]

10.  Investors are looking for government policy to encourage investment in low-carbon energy generation, which would be consistent and stable over time. The investors are also concerned that there should be agreement across political parties on the policy underpinning infrastructure investment to reduce the risk of changes in plans in the event of a new government.[19]

11.  Uncertainty can also arise within a Parliament if Government chooses to change current policy. For example, E-ON told us that it had suffered a financial penalty on an investment it had already made in combined heat and power stations when the 2012 Budget removed levy exemption certificates[20] which the 2009 Budget had said would be available until 2023.[21] The removal of the levy exemption certificate made the energy E-ON was supplying more expensive for the end user which affected the demand for this type of energy and E-ON's return on its investment. The Committee was aware that other companies will have similarly faced large unexpected losses from this change in government policy.[22]

12.  Overall there is a scarcity of finance to take forward economic infrastructure projects. The public finances are constrained and it is also difficult to raise money in the private sector. This suggests that a more rigorous approach to prioritisation is needed.[23]

13.  The Government is seeking to attract new sources of finance, particularly from pension funds. Government infrastructure should be a good investment for pension funds because it provides a stable long term revenue stream which increases each year by amounts which are related to inflation.[24] However, the National Association of Pension Funds (the Association) told us that, despite this attraction, there had been drawbacks for its members investing in infrastructure funds: high fees for the funds' managements, high amounts of debt which could create volatility in project returns and an investment strategy of making an early sale of investments rather than holding them for the long term.[25]

14.  To overcome these difficulties the Association had signed a memorandum of understanding with the Treasury in November 2011 to build a new fund for investing in infrastructure. This new fund would enable the pension funds to utilise their collective buying power and would suit the needs of pension funds with low fees, low amounts of debt and long term returns of 2-5% above changes in the Retail Price Index.[26] The pension funds would want certainty over these returns from the government as they were not interested in taking risk.[27]

15.  To secure private sector finance from parties such as pension funds which are seeking low risk investments, the government will either pay more to encourage them to invest or will need to take on more risk in the public sector to raise the finance. That may involve the government in providing subsidies or guarantees. The Government has said it is prepared to make available guarantees of £40 billion.[28] But it is not clear what the total cost of government support will be and there are limits as to how far these forms of taxpayer support can be provided when the Government is trying to reduce the deficit and publicly financed capital investment is also being reduced. [29]

16.  A particular concern is that in seeking to secure the increased infrastructure investment which Infrastructure UK has identified in its current National Infrastructure Plan taxpayers' money may be used to incentivise private investment in a way that leads to excess profits in the private sector at the expense of the taxpayer or consumer.[30] If investors receive a government guarantee over their revenue stream this may encourage them to commit their money; but it also creates an opportunity for them to benefit by capitalising their income stream and making a large and early profit on their investment which may not be shared with the public sector. This is a concern we noted in our report on offshore wind power transmission where it appears that consumers will pay a heavy price in their energy bills for attracting private investment..[31]

17.  A balance has to be struck between encouraging investors to participate in UK infrastructure projects and the reasonableness of their returns for doing so bearing in mind the risks involved. The investors we examined would not disclose the minimum returns, the "hurdle rate", they seek from projects.[32] While they are not under any contractual obligation to provide this information they are, nevertheless operating in markets where their activities may be receiving taxpayer support and where the ultimate cost of their projects will be borne by consumers. In addition, co-operation and transparency between the government and investors are needed to ensure that projects which will be paid for by consumers are taken forward in a cost efficient manner so that consumers are not burdened with high bills..[33]

13   The 64% that is expected to be wholly owned and financed by the private sector includes investment by Network Rail whose financing is underwritten by the public sector.  Back

14   C&AG's Report para7 Back

15   Qs 1,20,33-34 Back

16   Qs32-34 Back

17   Qs12-16 Back

18   PAC report HC621 (2013) : 20th Report: Department of Energy and Climate Change: Offshore Electricity Transmission-A New Model  Back

19   Qs1,34,59,70,90 Back

20   The climate change levy is a tax on energy payable by the end users in industry, commerce and the public sector. The tax is not payable where the energy supplied has qualified for a levy exemption certificate as coming from a renewable energy source. Back

21   Q 60 Back

22   Qs115-118 Back

23   Q76 Back

24   Q47 Back

25   Qs47-51 Back

26   Q51 Back

27   Qs53-59,72-74 Back

28   Qs 96, 141 Back

29   Q96 Back

30   Q141 Back

31   Q25 and PAC Report: HC621 (2013) : 20th Report: Department of Energy and Climate Change: Offshore Electricity Transmission-A New Model  Back

32   Qs39-41 Back

33   Q43 Back

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Prepared 29 April 2013